Why are rare earths rare?

The US 3rd quarter corporate earnings season kicked off with several of the world’s largest banks reporting pretty strong numbers, largely as expected. Jamie Dimon, post-JPMorgan’s strong numbers, offered his thoughts when it came to his view on the state of the US economy: “While there have been some signs of a softening, particularly in job growth, the U.S. economy generally remained resilient.” Going on to describe the current influences on investor sentiment, “complex geopolitical conditions, tariffs and trade uncertainty, elevated asset prices, and the risk of sticky inflation.” Not sure either of those observations was much in the way of “new news”, but as the man in charge of the world’s largest bank, one takes notice of his thoughts.

Stocks somewhat recovered on Monday as Trump and Xi exchanged conciliatory words about the risks of further trade hostilities concerning rare earth supplies and tariffs. For those unfamiliar, like me, rare earths are not rare because of their scarcity underground; they are rare due to the complexity of isolating and purifying them. Purifying rare earths is a hazardous process that produces radioactive waste, contaminating the environment and posing significant health risks to workers and local communities. Most countries, including America, are unwilling to take on those risks, but China is not. For this reason, it controls around 90% of the world’s rare earth supplies. Why are they essential? Simply, they are vital for products ranging from batteries and smartphones to wind turbines. China holds almost all the cards in the global supply of rare earths, which are vital to many emerging technologies and contributed to the tech sector’s hit on Friday when supply was threatened. Ultimately, the two largest economies in the world need each other, so it is assumed that a compromise between them will be found, but there will be verbal horse trading for a while yet, possibly until Trump and Xi meet later in the month. But this whole episode does underline America’s dependence on China for the rare earth supply, adding a new level of risk to the sector.

 The Vix fear gauge rose back over 20 yesterday. This suggests that the investor base still wants to protect itself as it sees further risks to stock prices in the short term. Investor sentiment toward equities had become a little extended. US 2-year treasury yields hit their lowest level this year, as the market is becoming more convinced of at least two further rate cuts this year.  Powell, giving a speech in Philadelphia yesterday, focused on employment rather than prices, describing the US labour market as showing further signs of distress, signalling that he could be ready to support another interest rate cut later this month.

Yesterday’s UK employment report did not make particularly good reading, which only makes Ms Reeves’ task that much harder for her November budget. The report may encourage the Bank of England to cut rates at its next meeting, despite inflation rates remaining well above their 2% target.